Not One Uncivil Servant has Been Fired

Kitty Miv, Editor25 July, 2013

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

I'm searching in vain for ways to reward countries this week: no-one has reduced taxes; no government has said that it is reducing the number of tax audits it carries out because companies are becoming more accurate and open; and not one uncivil servant has been fired, although the Greek Parliament has reluctantly agreed to swallow some of that medicine – not of course because it wants to or believes in making savings, but simply in order to get hold of the next, EUR6bn tranche of bail-out money which it won't otherwise receive. Needless to say the Unions immediately called a general strike. How many is that in the last couple of years? Probably the casualties will all be hired back again on short-term contracts anyway, in a way that won't be obvious to the Troika. Given the number of ways in which the Greek Government is choosing to defy the Troika, for instance this week through its continued provision of illegitimate subsidies to the State gaming sector, it is difficult to think that the Government has changed its ways to any significant extent. How do you repair a broken governance model? It's reasonably straightforward for a company: the shareholders sack the Board and put in an improved version. But with countries there is this inconvenient thing called democracy, and the ability of governments to bribe the electorate in countless minor and major ways, until the whole body politic is rotten. That unfortunately is the case with Greece, and no amount of visits from Brussels "suits" is going to get at the real problem. I don't know what will; it's depressing.

So my bouquets this week will have to go to the UE and the US for managing to have a first TTIP negotiation without the French walking out sulkily over their "exception culturelle," or the US motor industry attacking State Aid for Renault, Fiat or Volkswagen. Pascal Lamy, about to leave the WTO after two terms as Director-General, reflected a little sourly over the number of bilateral or trilateral or quadrilateral trade deals taking place while the Doha Round continues to shuffle sideways. Nobody but nobody has done more for world trade in the last ten years, so you can empathize with him without necessarily agreeing. People talk about the WTO having been diminished by the "failure" of the Doha Round, but I don't see it that way. Various countries have been accused of standing in the way of a Doha accord, but more likely it isn't the fault of any one country or group of countries; probably the Round was too ambitious in the first place. What the seemingly endless negotiations will have achieved is to show individual groupings what is in fact possible, and they have gone off and done it through the plethora of FTAs that have been and are being signed. These in turn act as a spur to competition for trading partners that get left out, and by now there is a dizzying array of FTAs of all shapes and sizes. Quite often these separate agreements do make use of WTO dispute resolution procedures and treaty fine print, so that all the time, the sum total of unresolved trading territory becomes smaller and smaller. The gap between what exists and what the framers of Doha originally wanted is now far smaller than it was ten years ago, and it becomes correspondingly more likely that Doha will, in time, come into being.

As we predicted in this column a while ago, Germany's attempt to tax the life out of tobacco users under the pretext of improving their health has run into the buffers. In Continental Europe, Germany, France, Belgium, the Netherlands and the Scandinavian countries form a contiguous bloc of relatively high-taxing countries (as regards tobacco). The UK and Ireland tax more highly, and that's because they are islands, so that border customs controls are easier to operate. But in other directions, the existence of the border-free Schengen Zone means that the central bloc doesn't dare to increase rates too much because of the ease with which tobacco can be smuggled into, say, Germany from, say Greece. The Germans appear to have overstepped the mark, and an increasing volume of tobacco is escaping German taxation altogether.

So the OECD has delivered itself of a package of proposals, principles and measures which it sees as being the basis for a "fairer" system for corporate taxation, particularly in respect of MNEs. Perhaps it is ironic that the package was presented to G20 Finance Ministers in Moscow, that beacon of transparency and fairness, but we'll leave that on one side and focus on the incontrovertibly false premise on which the OECD bases its reasoning.

The OECD contends that the process of globalization, while beneficial to domestic economies, has opened up a number of opportunities for multinational enterprises (MNEs) to "greatly minimize their tax burden." The result is a "tense situation in which citizens have become more sensitive to tax fairness issues." In turn, governments are now required to "cope with less revenue and a higher cost to ensure compliance."

I'm not sure about the first sentence; I've not seen any comparative figures which would substantiate it, and it's difficult to see how they could be assembled. Obviously there have been some instances in which large companies seem to have managed to avoid paying much tax; but setting aside the panicky reaction of Starbucks, they have done a good job of explaining and justifying, at least in their eyes, their tax policies. The second and third sentences are objectively untrue. There has been plenty of media hype, it's a fact, whipped up and sustained for political purposes by the likes of Margaret Hodge in the UK and a number of Democratic senators in the US, but where are the street parades of corporate taxation activists, demanding "fairness" from MNEs? The vast majority of voters and taxpayers haven't the faintest clue as to how corporate tax is calculated and paid or not paid, and the same appears to be true of Margaret Hodge and her ilk. This is posturing, pure and simple. As for the OECD, whose employees by the way pay no tax and which has a sumptuous Paris headquarters with a massive wine cellar fit for a prince, it is a deeply suspect organization with no democratic legitimacy or official position other than the roles that have been bestowed on it by government organizations such as the G20. Back in the 20th century it played a useful part in supplying economic statistics to governments, but its current inflated degree of self-aggrandisement has come about because of a largely left-wing anti-business movement among high-taxing Continental European countries, aimed at reducing tax competition between OECD members and low-tax countries, which played out between 1990 and 2010, and ended up by thoroughly capturing the OECD. It is true (see, I can be "fair" as well) that the OECD's Model Tax Treaty is useful, as is some of its work on transfer pricing.

Now we come to the final sentence, which is a straightforward untruth. It's not the case that governments now have to "cope with less revenue and higher cost to ensure compliance." Again, there are no figures to support this ludicrous assertion, which is palpably false. Presumably the words are directed at corporate taxation, but it's impossible to separate out corporate tax from the general burden of taxation, and almost without exception, the proportion of GDP taken in tax has risen over the last ten years in each of the OECD's 34 member states, and continues to rise. It's the over-taxation of individuals and businesses by governments to raise money to fritter away on what we can loosely call "pork" which leads to a sense of unfairness on the part of taxpayers, and causes them to try to optimize, not always within the strict letter of the law. For almost all of the OECD's member states, tax is running in the mid-forties as a percentage of GDP, and this is at least 10 percentage points above the level that people consider reasonable.

Instead of acting as the Finance Ministers' poodle, the OECD would do more for humanity if it returned to its original role of being a business-friendly, statistical organization. Better still, it should be abolished. Anyway, it will achieve nothing with its latest initiative, other than the destruction of a large number of perfectly innocent trees and the erection of yet more layers of bureaucracy to waste the resources of company finance departments.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 62nd) two or three countries are given encomiums and two or three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is on + 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

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